Friday, October 28, 2011

It has been reported that the President wants to change the student loan program. One change that is being touted is that students are allowed to consolidate private and public student loans.

Well, this isn't a change. This is a long standing policy. I had both private (i.e. Sallie Mae) and USDE loans (Public). I consolidated them with the USDE in 2000. What they do is average out the interest rates on all your loans to get a new interest rate for your current loan. The benefit is that you make one payment to one lender at one interest rate. Usually this means a single lower monthly payment. Credit counselors have used this trick for years to help "restructure" the debt of their clients. This type of consolidation is not new nor does it represent a change to the current student loan systems.

Assuring that student loan payments don't exceed more than 10% of someone's disposable income doesn't represent much of a change either.The student loan program introduced an "income contingent" repayment plan back in the early 2000s. They take your pay stub and based your monthly student loan payment on your gross salary. The bad news here is that if your income is low, then your monthly payment under the income contingent program may not be enough to cover the interest that accumulates over the moth. Interest that is not paid is capitalized, meaning added to the principle of the loan. So there is a whole cycle there. Interest needs to amortized like they do with home mortgages to really be fair and help students pay down the loans. Building bigger principle is simply a desperate measure to alleviate today's pain. Income contingent re-payment only keeps people under the boot of debt longer.

I am not sure if the Obama Administration is being misunderstood by the media, or if it really is selling a load of crap to the "Occupy" crowd and the voters. I would hate to believe that the Obama Administration is that cynical.

Really the best deal for students and lenders is what I already proposed in my earlier post.

69 comments:

What about the 20 year limit? That if your loans aren't paid off in 20 years, they're forgiven. That would seem to be a massive change, especially in combination with the income based limits on monthly payments.

It's not. When I took my loans, they had that provision in there. Then, I think it was rescinded. Now it seems to be back. However, the devil is in the fine print.

Currently, if you work for the federal government, they will forgive you after 10 years. However, over that 10 year period, you have to make payments on the standard re-payment plan. Under this plan, you payments are calculated so that the loan would be paid off in 10 years. Any payments that you make that are less than what you'd pay on the standard plan don't count toward forgiveness.

Therefore, effectively, nothing is forgiven. So I am suspicious about 20 years and forgiveness. If this is true, then we should all pay back as little as possible for 20 years and look forward to forgiveness. I doubt very much that this will be the case. They will make sure to get their flesh.

In 2005 when I got married my husband was able to consolidate his private and federal loans. 3 years later in 2008 when I graduated from law school private and federal loans could no longer be consolidated. (I tried several times). I have 5 student loan payments that total over $2,000/month and a 10% cap of my monthly disposable income would be greatly beneficial! In addition, a 20 year forgiveness is not that unusual, the IRS has a 10 year statute of limitations on their tax liabilities and I see clients pay very little towards their tax liability (based on their monthly disposable income) and at the end of 10 years hundreds of thousands of dollars in tax dollars EXPIRE and the IRS simply wipes it from their record. Look it up.

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